Reference no: EM133043486
Question - Good-Fit Garment Industry was established on July 01, 2018 who is manufacturing and marketing designer garments. After expiry of its first six months operations, the chief executive of the company was under considerable strain of finances. The following income statement for the first six months was prepared by the Accountant for the management:
Income statement for six months ended 31 December, 2018
Sales 2,000 dresses x Rs. 1,200 Rs. 2,400,000
Less variable cost of dresses sold:
Variable production cost Rs. 1,300,000
Variable selling expenses 300,000 1,600,000
Contribution margin 800,000
Fixed expenses
Fixed manufacturing overheads Rs. 900,000
Fixed selling and administrative expenses 50,000 950,000
Net operating loss (Rs. 150,000)
The chief executive of the company was discouraged over the loss shown for its half year's operation particularly because he had planned to use the income statement as support for a bank loan.
A professional management accountant, who happened to be a friend of the chief executive of the organization, suggested to redraft the income statement under absorption costing method which probably would show some moderate amount of profit. The cost data of production was scanned and following details were extracted:
Dresses produced 2,500
Dresses sold 2,000
Variable cost per dress:
Direct material Rs. 400
Direct labour Rs. 200
Factory overheads Rs. 50
Selling expenses Rs. 150
Required -
1. Calculate the unit product cost under variable costing and under absorption costing.
2. Prepare income statement under absorption costing.
3. Prepare reconciliation statement for the reported results under absorption costing with the variable costing.
4. During second half of the year, the company again produced 2,500 dresses and sold 2,750 dresses with no change in the fixed cost or selling price
i. Prepare income statement under variable costing.
ii. Prepare income statement under absorption costing.
iii. Reconcile variable costing and absorption costing net operating results.
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